O’Reilly Automotive, Inc. — Q1 2023 Form 10-Q Summary
Business Context and Reporting Period
O’Reilly Automotive is an automotive aftermarket retailer serving do-it-yourself and professional service provider customers in the United States, Puerto Rico, and Mexico. The filing covers the unaudited three months ended March 31, 2023, compared with the three months ended March 31, 2022. The company operated 5,986 stores in the United States and Puerto Rico and 43 stores in Mexico at quarter-end.
Financial Performance and Liquidity
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Sales | $3.708 billion | $3.296 billion | 12% |
| Gross profit | $1.890 billion | $1.708 billion | 11% |
| Gross margin | 51.0% | 51.8% | Down 80 basis points |
| Operating income | $716.6 million | $669.5 million | 7% |
| Operating margin | 19.3% | 20.3% | Down 100 basis points |
| Net income | $516.9 million | $481.9 million | 7% |
| Net margin | 13.9% | 14.6% | Down 70 basis points |
| Diluted EPS | $8.28 | $7.17 | 15% |
| Cash flow from operations | $713.8 million | $689.9 million | 3% |
| Capital expenditures | $223.3 million | $104.0 million | 114% |
| Free cash flow | $486.1 million | $579.4 million | Down 16% |
Comparable store sales increased 10.8%. The company opened 58 net new stores during the quarter. Professional service provider sales rose to $1.712 billion from $1.399 billion, while do-it-yourself sales increased to $1.918 billion from $1.816 billion.
Cash and cash equivalents were $59.9 million at March 31, 2023, compared with $108.6 million at December 31, 2022. Inventory was $4.544 billion, up from $4.359 billion at year-end. Total assets were $12.973 billion.
Long-term debt was $4.928 billion, including $555.0 million outstanding under the revolving credit facility, compared with $4.372 billion at December 31, 2022. The company had a $1.8 billion unsecured revolving facility maturing in June 2026 and approximately $4.4 billion of senior notes due from 2023 through 2032. It remained in compliance with all debt covenants. The fixed charge coverage ratio was 6.64 times versus a 2.50-times minimum, and the leverage ratio was 1.86 times versus a 3.50-times maximum.
Material Changes Versus the Prior Comparable Period
- Sales growth was driven by 10.8% comparable store sales growth and $68 million of sales from newer stores not yet included in the comparable-store base.
- Average ticket values increased for both customer groups, supported partly by higher selling prices reflecting increased inventory acquisition costs.
- Professional customer transaction counts increased, while DIY transaction counts declined, reflecting lower repair frequency for better-engineered vehicles and the timing of spring weather.
- Gross margin declined due primarily to the professional pricing initiative, a higher professional sales mix, and the absence of a prior-year benefit from selling lower-cost inventory acquired before recent cost increases.
- SG&A increased 13% to $1.174 billion, or 31.7% of sales, compared with 31.5% in the prior year. Drivers included the resumption of the in-person leadership conference, an enhanced paid-time-off program, and additional personnel, facilities, and vehicles.
- Interest expense increased to $44.6 million from $34.8 million because of higher average borrowings. The company also recorded a $4.5 million net other-income benefit, compared with $1.9 million of other expense in the prior year.
- Diluted EPS growth exceeded net income growth primarily because diluted weighted-average shares declined to 62.4 million from 67.2 million.
- Share repurchases totaled $1.111 billion, covering 1.357 million shares at an average price of $819.06. Approximately $611.9 million remained under the authorization at March 31, 2023.
Guidance, Outlook, Risks, and Unusual Items
Management anticipated 180 to 190 net new store openings in 2023. Management stated that it remained confident in gaining market share through its dual-market strategy, customer service, inventory availability, competitive pricing, new-store expansion, and omnichannel initiatives.
Management identified inflation, fuel and energy costs, interest rates, consumer debt, product demand, competition, weather, tariffs, supply-chain disruptions, labor availability, information technology failures and cyberattacks, international operations, increased debt, credit ratings, acquisitions, and government regulation as risks. The business is seasonal, with sales and profits historically stronger in the second and third quarters.
The company had $4.3 billion of obligations outstanding under supplier finance programs at March 31, 2023, included in accounts payable. It also committed to purchase approximately $300 million of renewable energy tax credits, anticipated by September 2024, and had approximately $3.1 million of additional solar-project capital contributions that were paid after quarter-end. Litigation was described as ordinary-course and not expected to have a material adverse effect in the aggregate.
Interest-rate exposure increased with revolving borrowings of $555.0 million at a weighted-average rate of 6.900%; management estimated that a 10% increase in interest rates would reduce annual pre-tax earnings and cash flow by approximately $4.2 million at that borrowing level. The filing text does not provide a separate full-year earnings or sales outlook.
Most Important Facts for Investors to Verify
- Whether strong comparable-store sales can continue without further pressure on gross margin and DIY transaction counts.
- The effect of higher interest rates and increased debt, including the scheduled 2023 senior-note maturity and revolving-facility borrowings.
- Whether capital expenditures and store expansion will generate sufficient returns while free cash flow remains below the prior-year level.
- The magnitude and terms of supplier finance obligations, which represented approximately $4.3 billion of accounts payable.
- Progress toward the 180–190 planned net new stores and the sustainability of professional-customer growth.
- Execution and funding of the approximately $300 million renewable-energy tax-credit commitment and other contractual obligations.
- Subsequent share repurchases: 0.2 million additional shares were repurchased through May 9, 2023, for $152.2 million.